Is Pinnacle Foods a Good Investment?

Demand for packaged foods has been increasing as a result of hectic lifestyles, fast-paced life, and a difficult economic environment. People are eating less outside and hence, they are cooking at home more often to stretch their dollars in the current economic scenario. Pinnacle Foods (NYSE: PF) , a manufacturer, marketer, and distributor of branded food products, has performed well as a result. The company has outperformed the likes of B&G Foods (NYSE: BGS) , General Mills (NYSE: GIS) and TreeHouse Foods this year and it looks good for more in the future.

Pinnacle's impressive growthAfter its IPO in March this year, Pinnacle Foods has done exceedingly well in comparison with its peers. Pinnacle Foods sells its products through supermarkets, grocery stores, mass merchandisers, convenience stores, dollar stores, drug stores, and warehouse clubs.

Hence, it is strategically poised to benefit from many different sales channels and hence, it is less vulnerable to economy-related changes in shopping behavior. Some might argue that even Pinnacle's peers also sell their products through such outlets, but the following data makes it quite clear how Pinnacle's wide distribution has helped it.

Pinnacle Foods has household penetration of 85% in the U.S. and its brands occupy the top two slots in 10 key categories. In addition, it also claims to be one of the top five frozen-food companies . It has been growing through mergers and acquisitions, with the most recent deal involving the Wish-Bone and Western dressings brands that it acquired from Unilever . This acquisition is in-line with the company's message to investors -- "Reinvigorating Iconic Brands."

On the back of robust demand for its products in North America, Pinnacle Foods reported revenue growth of 1% versus last year's third quarter to $572.5 million. The increase in sales was fueled by higher volumes in its Birds Eye frozen segment and its Duncan Hines grocery segment, but partly offset by a poor showing in its specialty foods segment. The company reported adjusted earnings of $0.36 per share versus $0.26 per share in the third quarter last year.

Going forward, Pinnacle guided for full-year earnings at the higher end of the range of $1.53-$1.57 per share. This includes a $0.01-$0.02 per share increase in earnings in the fourth quarter from the recently acquired Wish-Bone business . Pinnacle is targeting a payout ratio of 50% in order to keep investors happy. This leaves room for growth in dividends, which the company had already increased by 16.7% last quarter.

In addition, Pinnacle is using social media to bolster brand recognition and grow the consumption of its products. Its Duncan Hines Community member strength has grown a whopping 367% since January 2012 and it is now approaching 2 million . Online and social-media promotion initiatives will go a long way in popularizing brand image and usage. The company has also been working on improving its leverage and it has reduced its debt-to-equity ratio drastically as shown in the chart below.

Are any of its peers better investment options?B&G Foods has also been growing through a series of mergers and acquisitions, just like Pinnacle Foods. At the same time, B&G has also regularly increased its dividends since 2009. However, one cause of worry is that the company is growing primarily on the back of acquisitions, and the decline in its core business is best exemplified by B&G President and CEO David Wenner's statement:

Our base business net sales followed industry trends and declined for the quarter. Given current trends in the packaged foods industry, we expect growth in our base business to be challenging during the fourth quarter of 2013.

However, B&G has been able to overcome this through synergies as a result of serial acquisitions over the past few quarters. As a result, the consolidated results looked good as B&G Foods reported an increase in net sales of 17.6% versus the year-ago quarter to $181.4 million. Net income, however, declined 9.2% to $15.4 million and this was primarily due to acquisition-related costs and also due to debt repayments.

With a beta of 0.20, which compares to 0.75 for B&G Foods, General Mills is one of the most defensive stocks in the packaged food and ready-to-eat market space. General Mills commenced fiscal 2014 on a strong note, reporting an increase of 8% in revenue over the year-ago period to $4.37 billion . Earnings came in at $0.70 per share, which represented 6% growth versus the same quarter in the prior year. For fiscal 2014, earnings per share are expected to grow in the high single-digits.

Like its peers, the Cheerios maker is also growing through acquisitions and mergers. It is expanding aggressively in the international market and it registered a 27% year-over-year increase in international sales to $1 billion in the first quarter of 2014 . The acquisitions of new international businesses such as Yoki Alimentos in Brazil and Yoplait Canada led to higher revenue for General Mills. Also, Yoplait Greek yogurt and Pillsbury gluten-free dough played their parts in improving revenue.

What to choose?With a dividend yield of 3% and a low beta, General Mills is the ideal defensive pick in the industry. However, investors looking for both growth and dividends should look at Pinnacle Foods. Pinnacle is cheaper than both General Mills and B&G Foods going by trailing P/E.

Also, Pinnacle has a decent dividend yield of 3.10%. The company's products are present in most of the U.S. households as we saw above and it has some good strategies to grow its business. All in all, Pinnacle looks like a good buy and investors should definitely consider it for their portfolio.

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